Unette still run as traditional company
By
Tim O'Reiley, Daily Record, Dec. 17, 2002
WHARTON - On the shop floor of Unette Corp., plant manager Ken Harris acts every bit the employee shareholder that he is.
Each day, he reviews with production workers how much money their line made or lost the day before and what changes must be made.
He also scans the plant constantly for materials that disappear faster than they should.
"I'm always watching out for where things are going: the toilet paper, tape, boxes, customer products," he said. "I know that if we keep costs down, our profits will go up and build the value of our shares."
Harris exemplifies how employee ownership, which started at Unette 14 years ago, is supposed to sound and perform.
But the bankruptcy of United Airlines, blamed in part on the huge raises that employees received after being granted 55 percent ownership and two seats on the board of directors, has stripped away much of the idealism and romance that has graced employee ownership for more than two decades.
It also has put proponents on the defensive.
"It is not necessary for employee ownership advocates to express bitterness or dismay toward the cynics, who amid the media outcry with regard to United Airlines, are smitten in their belief that employee ownership does not work," said J. Michael Keeling, president of the ESOP (Employee Stock Ownership Plan) Association in Washington, D.C.
After reviewing more than 70 studies on ESOPs, Rutgers University professor Douglas Kruse said, "One of the important findings is that employee ownership does not automatically lead to improvement in attitudes. But it is almost never a negative."
Companies need to find a balance between keeping clear lines of authority yet informing workers about the condition of the business.
"With the majority of ESOPs, employee ownership attitudes are not built into the culture," Kruse said. "Simply putting a couple of people on the board doesn't really affect the daily job."
Unette, which packages liquids, gels and creams for consumer use, has not only avoided ruinous labor costs but has managed to survive a rough 2001 in part by imposing layoffs.
Even with 100 percent employee ownership for the past four years and two employees on the five-member board of directors, the nonunion company largely follows a traditional management model, rather than function as a factory-floor democracy.
Employees can put forward director candidates but may not elect them.
"You have to be careful that the ESOP doesn't tie your hands," said Joseph R. Hark, president and chief executive of Unette. "If you are dealing with a lot of mechanics, you have to keep in mind they don't have a lot of experience with business in general."
Still, management does have to deal with constraints that it might not face elsewhere.
When the company decided to consolidate several sites in Parsippany, it considered lower-cost areas in Pennsylvania and North Carolina, a path taken by other New Jersey plants.
Ultimately, it moved to the Wharton location in 1994 because the employee shareholders did not want to uproot themselves.
In addition, the quarterly reports that employees receive have given them a sense of their due.
Thanks to a sharp rebound in business, "employees are expecting a bonus this year," Hawk said.
The implications of employee ownership have spread unevenly through the ranks.
"You feel if you do well in your job, then the company will do well and make more money," said Matt Shubilla, one of two employee directors.
Marva Usry, a 28-year veteran of the production lines, added, "When you are an owner of the company, you have more interest on the job."
Several others, while supporting ownership as an attractive benefit, could not describe how employee ownership influenced day-to-day performance.
"I haven't seen the difference yet," said Glenn Terwilliger, who rejoined the company in June after living in Florida for several years.
Hark recalled that when the company asked for volunteers to join the board, only a handful stepped forward while many showed no interest at all.
Law creates benefits
Employee attitudes aside, the law has created some tangible benefits for employee-owned companies.
After becoming wholly owned by employees, Unette converted to a subchapter S corporation, which pays no income taxes. Instead, profits are paid as dividends to the trust that owns the stock, which is also tax-exempt.
"This can add up to a significant amount of money," James F. Higgins, a principal at the Morristown office of Menke & Associates, an ESOP advisory firm.
Hark also credits employee ownership for being a good recruiting and retention tool, although that was not always the case.
Originally, the Unette plan allowed employees to sell their shares back to the company immediately after resigning but that prompted some people to quit just to get the cash, Hark said. If too many people had left at once, the company could have run out of money.
Later, the company rewrote the plan to fit the legal minimum, requiring it to buy back shares over a one-year period five years after an employee leaves.
Only employees who retire at age 62 or later, become totally disabled or die are entitled to have their shares purchased within a year.
Creating employee trust
Started in 1955, Unette was put on the market in 1987 after owner John Kemmerer retired and his son decided to cash out after several years of growth had roughly doubled the size of the company.
Senior managers Robert C. Smith and George F. Wohlgemuth wanted to stay on but shied away from pledging personal assets as collateral to secure the loans that would have financed a leveraged buyout, Hark said.
On the advice of accountants, Hawk looked at and ultimately helped put together the employee trust that bought 70 percent of the company for $3.5 million, while Smith and Wohlgemuth purchased the rest for an undisclosed price.
The trust technically is a retirement savings plan that is advised and administered by outsiders.
At the time, federal tax incentives had fueled the burst in employee ownership nationwide from 200 companies in 1974 to 10,000 in 1990, although the growth since then has been slight because of the repeal of some tax benefits.
The ESOP Association ranks Honeywell International as the second-largest ESOP in the country with 55,000 participants, although employees hold only a small share of the stock.
When Smith and Wohlgemuth decided to retire in 1998, the employee trust bought out their shares for $2.1 million by taking out a loan. As the loan is paid down - the balance is less than $1 million - the shares used for collateral are meted out to employees.
Once the loan is paid off, Hark will advocate having the trust purchase 25 percent of the stock from employees on a pro rata basis so it has shares to grant to newcomers.
Buyout based on shots
One of the reasons that Hark led the second buyout is embodied in the new product he shudders at: vodka shots in foil squeeze tubes.
A British client ordered the innovative packaging, which will be taped to cans of mixer for people who want a pre-measured, do-it-yourself cocktail.
It's an open question whether drinkers will want to pour their drinks like mustard. An experiment in the 1980s with canned wine, for example, never caught on.
Still, the tubes illustrate how Unette will try to outpace a consumer products industry in which sales often grow in the low- to mid-single-digit percentages.
Vodka, Hark explained, does not keep in the single-use plastic tubes with the tear-off top that Unette pioneered in 1955, but the company did not have the machinery to create foil tubes.
By investing in new technology, Unette landed a new client and potentially opens a new market that could include the small bottles stocked by airlines and hotel minibars.
"I thought at the time (of the second buyout), there was still a lot of untapped market share for us," he said. "I thought through technology, research and development, and new marketing, we could top the industry average."
After they slowed in the late 1990s, Hark has boosted marketing efforts and attended more trade shows. In addition, Unette has added new labeling processes to put vivid graphics on tubes rather than plain writing.
In another area, the company is evolving slowly. Unette has always been a final assembly point, whether for a tube of facial cleaner or a small plastic bottle of mouthwash. Except for the tubes, other companies send Unette all the components for packaging.
Revenues this year, which Hark said will be "$12 million plus or minus," will be split evenly between products in tubes and those in bottles or jars. About 70 percent will contain personal hygiene compounds destined for cosmetics counters or hotel rooms and the rest for household items, such as glue.
Hark said clients want packagers, such as Unette. to take over more of the process, such as mixing shampoos or lotions. While this could bring higher profit margins, Hark worries that the spending to buy new equipment and the liability for mistakes could prove very expensive for a relatively small company in a difficult economy.
"We're doing this, but we're doing it cautiously," he said. "Anybody who does expand in this market is taking a big risk. We want to grow slow and steady."
For example, Unette has moved into blending liquids in small steps after studying the process for a decade.
Whatever the changes in the market, the ownership will not change.
"Employee ownership can add to a company," Hark said. "I don't believe it takes away.
About Unette Corp.